When homeowners are considering applying for a home equity line of credit, it is important that they first calculate roughly what they can afford. In order to do this, the homeowner needs to start with some general figures and calculate the amount of monthly payments. Before you can do this, you must first know how the home equity credit payments work and how to calculate them.
One of the benefits of a home equity line of credit [or HELOC is often referred to as] is that you do not have to pay any principal during the draw; you only pay interest accrued for that month. This is a big advantage for HELOCs, but it is also the most terrifying of the homeowner. Because HELOC usually has variable interest rates, the interest owed each month will be different, and the homeowner thinks it is too complicated to calculate. The good news is that it is not!
Before you start calculating your HELOC payment, you first need to know the principal amount of the loan and your annual percentage [which you can get from the credit]. First divide the annual percentage by 1200 to calculate the interest rate you paid. If your annual percentage is 4.04%, divide this number by 1200 and get 0.003% - this is your monthly rate. Once you have this number, you can simply multiply it by your principal amount to determine the amount of interest you need to pay. So if your annual percentage is 4.04% and you borrow $10,000 from HELOC, the amount of interest you owe in a month will be $33.66. This may be the total amount you paid in a month, as this will be the full amount due; however, you can also lower the interest on your monthly payments by lowering the principal amount.
Although you do not need to pay any money to the client each month, doing so will reduce your monthly interest payments. Since interest is determined as a percentage of the principal amount, you will automatically reduce the loan amount when you make a principal payment. If you want to pay the same amount of the principal each month, you only need to divide the principal amount by the credit line. So if your credit line is $10,000 and extended for three years, you only need to divide $10,000 by 36 [months] and your monthly principal is $277.77.
It is also important to understand that once the draw period is over, the homeowner will only pay the interest period and the amortization period will begin. This amortization period will use the owner's credit responsibility and will be used during the remaining loan term. During amortization, the principal and interest are paid, so the homeowner may need to recalculate the monthly payment for the home equity credit line.
Orignal From: How to calculate the home equity credit limit
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